7.

29

a. b. c. d.

Incorrect Correct Incorrect Incorrect incorrect incorrect correct incorrect Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect Correct Incorrect Incorrect Correct Incorrect Incorrect Incorrect Correct Incorrect Correct Incorrect Incorrect Incorrect Incorrect Correct

Allowances can be made for anticipated returns if the earning process is substantially complete. The earning process is complete at this point. Under accrual accounting, the cash does not have to be collected, only collectible This is usually the method for determining b but the shipment might be FOB destination This only initiates the earnings process, it doesnt complete it This is often the case, but it depends on shipping terms This is often the same as the bill of lading date Under accrual accounting, the company doesnt have to wait for the check to record revenue This would not have the outstanding balance; however, there are some times when the auditor confirms the sale instead of the amount receivable. This would have the balance for confirming This would not have the individual customer balance This would not have the balance outstanding This is an essential part of the cycle This is an essential part of the cycle Cash is affected by the collections Even though this involves shipments, it is considered part of the expenditure and disbursement cycle The sale could occur but not be approved for credit The approval has nothing to do with completeness Credit approval helps ensure the sale will be collectible Credit approval will not affect when revenue is earned The general ledger bookkeeper doesnt have access to the customer accounts. Theres no advantage to separating access to checks and currency. Nobody in the company has access to cash, therefore it cannot be stolen. Normally checks are made payable to company. That doesnt prevent lapping. Impropriety of write-offs can be controlled by the review and approval by someone outside the credit department. Even write-offs of old receivables can conceal a cash shortage. The cashier could be the cause of the shortage. Write-offs should be separated from the sales function. This would increase gross profit. Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator in the ratio, causing the ratio to decrease.) This would increase gross profit. This would increase sales and cost of sales, and the ratio would not change. If cost of sales is not recorded, gross profit would increase This doesnt verify that the sales invoices represent actual shipments. This would require tracing from shipping documents to invoices. This would require tracing from invoices to customer accounts.

7.30

a. b. c. d. a. b. c. d.

7.31

7.32

a. b. c. d. a. b. c. d. a. b. c. d. a. b. c. d.

7.33

7.34

7.35

7.36

a. b.

c. d. 7.37 a. b. c.

Incorrect Incorrect Incorrect Incorrect Incorrect

7.38

d. a. b. c. d.

Correct Incorrect Incorrect Incorrect Correct

Vouching is used to establish support for recorded amounts. Unrecorded costs would not increase sales. Improper credit approvals would not lower COGS. Goods were shipped for these sales and COGS as a percentage of sales would be unchanged Improper sales cut-off would not decrease COGS as a percent of sales. Fictitious sales would increase sales. Since no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for fictitious sales is accounts receivable, causing accounts receivable to increase. Additional inquiries would not provide sufficient corroborating evidence. Reviewing the chances in pricing during the year and ensuring that customers were charged the new prices provides sufficient, reliable evidence to support the sales managers representation. This is an ineffective use of confirmations and requires respondents to identify unit costs and report information. Payments on vendor invoices would not indicate that prices had increased during the year. When an account is recorded as a receivable it is already recorded as a revenue. Adding additional revenue would not cover the theft of accounts receivable Receiving money from petty cash would be a poor method to cover the theft of accounts receivable. The money in petty cash would have to be accounted for and is not likely to be sufficient to cover any significant amounts Miscellaneous expense would raise suspicion as all miscellaneous accounts are high risk and subject to review. In addition, accounts receive are usually not written off against an expense Using the sales returns account would raise the least suspicion because this account is more commonly linked to accounts receivable. A bookkeeper could steal money and write off to unsuspecting customers balance with a fictitious sales return. The payment is probably in transit. The shipment is probably in transit. This should have been recorded as a reduction to the receivable by 12/31. This occurred after the end of the period. A schedule of purchases and payments would be used to test transactions and might be performed. Negative confirmations would not be an appropriate choice for large account balances The terms on the accounts receivable would not provide information on balance and transaction amounts The most likely audit step where there are a few large accounts is to send out positive confirmations. The aged trial balance provides only indirect evidence about controls. The aged trial balance provides no evidence about accuracy. The age of accounts is an indication of credit losses. The aged trial balance provides no evidence about existence. Lapping pertains to cash receipts, not sales. False sales journal entries made near the end of the year may have shipping or other documents that reveal later dates or show lack of sufficient documentation. See answer a.

7.39

a. b. c. d.

Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect Correct

7.40

a. b. c. d.

7.41

a. b. c. d. a. b. c. d.

Incorrect Incorrect Correct Incorrect Incorrect Incorrect Incorrect Correct Incorrect Incorrect Correct Incorrect Incorrect Correct Incorrect

7.42

7.43

a. b. c. d. a. b. c.

7.44

d. 7.45 a. b. c. d. 7.46 c.

Incorrect Incorrect Incorrect Correct Incorrect Correct

This step would not detect misappropriation of merchandise. Receiving a confirmation is not proof the customer will pay. Confirmation will not detect if the receivables were sold or factored. Accounts receivable confirmation enables recipients to respond that they owe the company or that they dispute or disagree with the amount the company says they owe. Confirmation provides only indirect evidence that controls are working. Checking the sequence for missing numbers identifies documents not yet fully processed in the revenue cycle. It does not provide evidence about accuracy, cutoff or occurrence. The accounts receivable debits are supposed to represent sales that have been ordered by customers and actually shipped to them. This is not evidence about existence. This provides some evidence about existence, but even if the receivables havent been paid, they may still be valid. These file will likely not provide evidence about specific sales. This is an important assertion, but financial statement users are less likely to be damaged if assets are found that have not been recorded. Financial statement users are more likely to be damaged if assets are found not to exist. Ownership is important, but doesnt matter if the assets dont exist. Presentation and disclosure assertion is important, but not as important as existence for asset accounts. Mainly because the other three choices are listed as appropriate work to do. Also, customers are likely to ignore negative confirmations after earlier responding to positive confirmations Negative confirmations are most appropriate when the assessed level of risk is low, dollar balances on accounts are small, and the auditor believes recipients will give consideration to the confirmations. The auditor assumes customers are likely to respond to errors. Because negative confirmations offer higher detection risk, risk of material misstatement should be low when they are used. Because negative confirmations offer higher detection risk, risk of material misstatement should be low when they are used. Shipments are traced to customers invoices. (This does not imply that the invoices were recorded in the sales journal.) See (a) above. The invoice copies need to be traced to the sales journal and general ledger to determine whether the shipments were recorded as sales. Recorded sales were shipped is not established because the sample selection is from shipments, not from recorded sales. See (c) above. Salespeople could write-off accounts for their friends to keep them from having to pay The credit manager may propose write-offs to reduce days outstanding and make him/her look better The Treasurer or another high-ranking manager should approve write-offs.

7.47

a. b. c. d.

Correct Incorrect Incorrect Incorrect Incorrect Correct Incorrect Incorrect Correct

7.48

a. b. c. d.

7.49 . 7.50

c.

a. b. c. d.

Correct Incorrect Incorrect Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect Correct

7.51

a. b. c. d.

7.52

a. b. c.

d. 7.53 a. b. c. d. 7.54 a.

Incorrect Incorrect Correct Incorrect Incorrect Correct

The cashier could take receipts and write off the balance. A second request is the first step that should be performed. As the confirmations are a sample of the account balance, even immaterial items should be followed up as they represent other balances in the universe of receivables. Shipping documents should be examined to test existence of the receivable. Client correspondence files may also provide evidence the receivable exists. Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation. The control account wouldnt match the total of customer accounts. Customers would catch the overstatement when examining their statements. This is a possibility, but (a) is a better answer. There is less likelihood of getting caught if the sale is never recorded. The stolen cash wouldnt be in either of these documents. Lapping is not accomplished through write-offs. Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed. The best protection is for the customers to send payments directly to the companys depository bank. The next best procedure is to assure that the accounts receivable clerk has no access to cash received by the mail room. Thus, the duties of receiving cash and posting the accounts receivable ledger are segregated. See answer (a). A negative confirmation might be used if control risk is low. As detection risk is lower for positive confirmations than negative confirmations, a positive confirmation is more likely when inherent risk is high. Whether the account is due or not usually doesnt affect the type of confirmation. However if it is long past due, a positive confirmation is more appropriate. A related party account may be a factor that influences a decision to send a positive confirmation. The fact that this account was not a related party would likely lead the auditor to choose a negative confirmation.

b. c. d. 7.55 a. b. c.

Incorrect Incorrect Incorrect Incorrect Incorrect Correct

d. 7.56 a. b. c. d.

Incorrect Incorrect Correct Incorrect Incorrect